Budgeting: Bring It On

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It’s no secret that budgeting is the bane of the CFO’s existence — an annual battle to wring information and concessions out of operating units while generating 45,000 spreadsheets that, in the end, provide a best-guess at the upcoming year’s results. But time-consuming as it is, the budgeting-and-planning process is also one of the finance department’s best opportunities to truly play the role of strategic partner to the business units. The top finance teams know this and are spending more on B&P even while their overall finance spend declines.

“There are two areas in finance where world-class organizations have actually increased spending relative to revenues. One of those is compliance, and the second is planning and analysis,” says Bryan Hall, finance practice leader at consulting firm The Hackett Group. The best finance departments, which Hackett defines as those that perform in the top 25 percent on a variety of efficiency and effectiveness metrics, have upped their B&P spending, and they devote 5 percent more of their total finance dollars to planning than average companies do — 23 percent versus 18 percent.

Finance teams are able to focus on budgeting and planning now that they’ve completed some major projects, says Jason Balogh, a principal in the finance practice at Archstone Consulting. “There was the Y2K enterprise resource planning [ERP] craze, and finance had to make those systems work. Then they went right into Sarbanes-Oxley, and the company’s planning capability was never fundamentally addressed,” he says. “Now, over the next 12 to 18 months, companies are really saying it’s time to look at planning.”

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Simtek, a small semiconductor company based in Colorado Springs, Colorado, spent several hundred thousand dollars over the past two years to implement a new ERP system and develop additional forecasting tools internally. The finance team also just completed its initial Sarbox documentation.

Now, says Simtek CFO Brian Alleman, who is also a partner with Tatum LLC, the company is using its new technology to better forecast things like “design wins,” which occur when customers include Simtek’s unique product in their new designs. “Based on the historical data we get from our information systems, we can tell when we should expect to see revenue from the design win and when revenue from old products will be trailing off,” says Alleman. “We never had the ability to see that data before.”

The best finance organizations are more likely to do such forward-looking analysis as part of their B&P process, according to Hackett. More than half of their analysis time is spent on proactive planning rather than historical reporting, unlike other companies, where only 46 percent of the time is spent looking ahead. “It’s far more insightful to use the historical information to say what is going to happen in the next 12 months than it is to simply cobble together a trend line,” says Hall. “But many organizations struggle to accumulate the data needed even for the historical reports.”

Budgeting Redefined

An increasing number of leading finance teams are moving away from the traditional budget altogether, says Steve Player, managing partner of consultancy The Player Group and program director of the Beyond Budgeting Roundtable. Many finance executives are now looking four to eight quarters ahead in their forecasting. While a five-quarter forecast used to be the most prevalent, Player says that is trending upward. “There are a lot more six-quarter rolling forecasts now,” he says. “People are getting comfortable with the idea of a rolling forecast and moving on from there.” Archstone’s Balogh agrees: he says three out of four of his clients are at least considering rolling forecasts and thinking about when they might move to such a model. Some are making incremental changes, including one client with $15 billion in revenues that is hanging onto its traditional budget while also introducing rolling forecasts.

Simtek currently does an annual budget, but Alleman says that is changing as the company gets up to speed with its new ERP system. “Budgeting is probably the wrong word for what we do,” he says. “We’re really doing more data analysis of what’s going to happen next month and next quarter. We’re trying to look at it more in real time rather than just having an annual process.”

Such a move conforms to the reality of today’s budget better than the static annual approach, says Alleman. “If you can tell me what your business is going to look like a year from now, I would argue you are probably not looking outside the business hard enough. There are going to be surprises.”

Kate O’Sullivan is a senior writer at CFO.

Buying a Better Budget

AMR Research predicts that spending on business-intelligence tools — including budgeting-and-planning software — will be up for 2007, with software spending increasing at a rate of 8 percent. The category overall was expected to grow 3.6 percent.